As Trump Administration Tries to Roll Back Student-Loan Oversight, It Finds Itself Repeatedly in Court

Student-loan advocates want the Consumer Financial Protection Bureau to do its job and supervise the student-loan-servicing market, as it is required to by law.

The bureau, known as the CFPB, has the authority to make sure large loan-servicing companies like Navient, FedLoan Servicing, and Nelnet do not push borrowers toward expensive repayment plans. However, a rule issued by the bureau in September 2018 allowed the agency to abandon its oversight of federal student loans — roughly 80 percent of the student-loan market.

A lawsuit filed last month in a U.S. District Court in California urges the court to intervene and compel the CFPB to conduct that oversight. The agency’s failure to do so has significantly hurt student borrowers, said Michael C. Martinez, senior counsel at Democracy Forward, a plaintiff in the case. The watchdog group filed the lawsuit on behalf of Student Debt Crisis, an advocacy organization aimed at reforming higher-education loan policies.

“The government has the authority to push these servicers to comply … but they are just not doing it,” Martinez said. “By removing protections, you’re going to see the effect that you are seeing now. There will be spiraling debt loads and growing mismanagement.”

The lawsuit is just the latest among many that have challenged the Trump administration’s sweeping measures to scale back the oversight of loan-servicing companies, as well as the accountability of for-profit colleges that defrauded students. While the administration has largely succeeded in loosening restrictions, it has done so after many hours in court.

By blocking meaningful oversight, the administration is allowing the servicing companies to operate under “lawlessness,” said Seth Frotman, executive director of the Student Borrower Protection Center. Frotman is a former CFPB assistant director and student-loan ombudsman.

“No matter what they tell themselves, no matter what they tell you about what they are trying to accomplish, what their motivation is, the end result is the same,” Frotman said. “Millions of families that took on student-loan debt to try to get a better life for themselves or their families are going to continue to get ripped off by big financial companies. And they’re going to struggle to get justice after they do.”

Loan Crisis as Information Problem

Since Trump took office, his administration has pursued its free-market agenda as aggressively as possible while trying to avoid a polarized Congress, according to Robert Kelchen, an associate professor of higher education at Seton Hall University, who points out that the Obama administration took a similar approach of relying on regulatory changes to pursue its debt-forgiveness reforms.

Under the education secretary, Betsy DeVos, the Education Department has depicted the student-loan crisis as an information problem. It has provided new tools that give borrowers more information about the quality and cost of the college program they plan to enroll in, the debt they have accrued, and their loan-repayment options, so they can avoid poor-performing programs.

The department said in a statement that it is still performing oversight of servicers, by conducting routine site visits, monitoring calls with customers, holding quarterly meetings with companies, and issuing letters admonishing servicers when needed.

“We are committed to maintaining a level playing field in which all institutions are held accountable to students,” the statement said.

But administrative actions have hampered recent reforms intended to better oversee the servicers and to help students who attended fraudulent for-profit colleges recover.

The Department of Education declined to comment on the recently filed lawsuit and said Congress had given it the authority to oversee the Federal Student Aid portfolio.

At times the department has been rebuked by the courts following lawsuits by advocacy groups. Advocacy and consumer-watchdog groups, for instance, had a series of wins in federal court against the administration’s efforts to undermine the Borrower Defense to Repayment rule. The Obama-era rule forgives student-loan debt for borrowers who attended colleges that misrepresented the value of their degrees or broke contracts with their students.

The rule is supposed to provide relief to students who attended now-defunct for-profit institutions, including Corinthian Colleges. However, DeVos has called it bad policy.

The administration at first tried to delay the 2017 rollout of the rule so the Education Department could rewrite it. But a federal judge ruled that the department’s decision to delay it was “arbitrary and capricious,” and allowed it to take effect in 2018, according to The New York Times.

This past spring, internal memos obtained by National Public Radio revealed that DeVos had overruled career Education Department staff members who had determined that students defrauded by those colleges deserved full reimbursement, saying most of the borrowers deserve just partial loan relief.

“Simply discharging all of these loans, as some on this committee suggest be done, is not fair to taxpayers nor to those who have paid or are paying their loans,” DeVos told members of the House Education and the Workforce Committee on Thursday. She was called to testify in response to her administration’s actions surrounding borrower defense.

As a result of another lawsuit, the Trump administration was compelled by court order to stop collecting federal tax returns and wages from defrauded students who were awaiting a determination of whether their applications to receive relief had been granted.

In October a federal judge held DeVos in contempt of court and ordered the Education Department to pay $100,000 in fines for violating the court order by continuing to collect loans from the defrauded students.

The department said loan-servicing companies had mistakenly billed more than 45,000 borrowers who had since been reimbursed.

Another federal judge recently allowed a class-action lawsuit, filed by thousands of borrowers awaiting the processing of their relief applications, to proceed.

Victories for DeVos

But while relief for defrauded students could continue in the short term, the administration appears poised to codify new rules surrounding Borrower Defense to Repayment that will restrict the number of eligible borrowers.

Under the new rules, which will take effect in July 2020, borrowers will have to prove they were harmed financially because they enrolled at a college that persuaded them to attend by making knowingly false or misleading statements. The rules will also roll back a provision that wipes away loans for students who attended a college that closed before they earned their degree. There are no lawsuits challenging the rule change.

The administration is also poised to scrap another Obama-era rule, known as “gainful employment,” which penalized college programs that leave a large number of their graduates with few job prospects and unmanageable student-loan debt. The Education Department says the rule targets for-profit colleges and programs based on their tax status; no pending lawsuits could block the rule’s repeal from taking effect in July.

The administration started rolling back protections for servicers shortly after taking office, in January 2017. Within months, the administration rescinded Obama-era policy memos that would have held servicing companies responsible for not providing borrowers accurate and consistent information about their student-loan debt. The memos would also have provided financial incentives to companies to conduct outreach to borrowers at risk of defaulting on their loans.

The department later rescinded a sharing agreement with the CFPB and blocked the consumer watchdog from providing oversight of student-loan servicers.

Now the department is blocking dozens of states from investigating the student-loan collection companies themselves. The department says only that it has the authority to provide such oversight and is preventing state attorneys general who are suing such companies from obtaining important information and data.

Citing privacy laws, the administration has instructed Navient not to provide information to the CFPB or to attorneys general of several Republican and Democratic states, including California, Illinois, Mississippi, Pennsylvania, and Washington. However, several federal judges have ruled against that rationale for blocking such information sharing.

Attorney General Xavier Becerra of California said in a written statement that neither the Department of Education nor the consumer-protection bureau had acted like “the adult in the room” when borrowers needed them the most.

“Stripping critical state oversight of this industry only serves to greenlight shoddy practices to the detriment of our nation’s next generation of leaders, and we won’t stand for this in California,” Becerra said.

Kelchen, of Seton Hall, said it was still unclear whether the Trump administration actually wanted to completely roll back oversight of the servicers, or if it just doesn’t want the CFPB — an agency Republicans have tried to dismantle — or Democratic attorneys general to do it.

However, a report in March from the Education Department’s Office of the Inspector General found the Federal Student Aid office had failed to properly oversee the loan-servicing companies and hold them accountable when they were not following federal regulations. Kelchen said the office, as it stands, does not have the ability to provide that needed oversight, and he is not sure how hard the administration is actually trying to do it.

As for what lasting impact the administration will leave, the new rules surrounding Borrower Defense to Repayment and the rollback of the gainful-employment policy will be on the books for at least three or four years if a Democrat wins the White House, Kelchen said. It typically takes a few years for rules to take effect.

Frotman, of the Student Borrower Protection Center, thinks the administration’s action will backfire politically. There is growing bipartisan support, he said, for accountability over the companies that helped usher millions of people into financial hardship. Recently, Trump has demanded that his aides come up with a plan to tackle the student-debt crisis and the rising cost of college.

In the meantime, Natalia Abrams, executive director of Student Debt Crisis, wonders how much further DeVos and the Trump administration are willing to go in pursuit of their hands-off agenda.

“Go back to a semi-privatized form of student loans, get rid of student loans, I don’t know. … She is clearly not looking out for the interest of the borrowers,” Abrams said. “There’s a lot of finger-pointing going on, and there’s tens of millions of people that are suffering while this is happening.”

Danielle McLean writes about federal education policy, among other subjects. Follow her on Twitter @DanielleBMcLean, or email her at dmclean@chronicle.com.